Budgets and Control Reporting 9

	management
	Accounting: Budgets and Control Reporting

Divisional Budgets

The budget may be prepared for the organisation as a whole but in a divisionalised company where considerable responsibility is delegated and divisions operate as semi-autonomous companies, a divisional master budget may be established first. The head office management will then be faced with the task of examining each divisional budget and integrating them into an overall corporate budget which is compatible with their overall business strategy. The role of head office management in these circumstances becomes akin to that of investment fund managers, deciding on the basis of financial accounting statements and background information which portfolio of companies to invest in and which to sell. Where industrial conglomerates rely on buying and selling companies through share-dealing activities on the stock market, they must rely on better market knowledge or control of technology or expertise in order to beat the shareholders at their own game.

Otherwise their motives may simply be aimed at reducing the personal risk faced as individuals managing a single company by diversifying the company's investments - a goal that probably conflicts with shareholders' interests.

Strategic Considerations

Depending on their overall strategy for their portfolio of divisions, head office managers may wish to set goals for specific divisions in terms of profit, cash-flow, growth etc. to fit into an integrated financial strategy. For instance, one division may be expected to hold back investment and generate surplus cash so that head office can use the cash generated to invest in another division that is in a growing market that requires more investment than it can fund from its own operations. In this way head office can effectively operate an internal capital market. These types of financial strategies are often referred to as 'financial entrepreneurship'.